Estimated 1H22 earnings grew 39% YoY
　　We estimate WH Group’s core attributable net profit grew 39% YoY to US$748mn in 1H22, in line with our previous forecast thanks to the YoY increase in per-tonne profits of Chinese and US meat products.
　　Trends to watch
　　Chinese business: In terms of meat products, WH Group reported a lower per-tonne profit in 2Q22 than in 1Q22 due to QoQ hog price hikes. However, we estimate per-tonne profit of meat products stayed solid in 2Q22 thanks to relatively low costs. Sales volume rose in regions stricken by COVID-19, but came under pressure in places with travel restrictions. We believe sales volume of meat products remained largely flat YoY due to the customer traffic decline and difficulties in offline promotion in places under travel restrictions. For fresh and frozen products, sales profits of imported and domestic meat products were limited in 2Q22. We think profits of fresh and frozen products were generated primarily from sales of fresh products. Therefore, we estimate WH Group’s slaughtering business profit at Rmb50-70 per head. In addition, profits from poultry and other businesses were likely pressured in 2Q22, in our view. Looking to 2H22, we suggest keeping an eye on hog price trends and sales of domestic frozen pork.
　　US business: For meat products, the per-tonne profit of meat products in 2Q22 remained at historical highs but was lower than that in 1Q22 due to the QoQ increase of hog prices. For pork products, as US hog prices are usually higher in the second and third quarters, 2Q22 hog prices rose more than pork prices QoQ. As a result, profitability QoQ improved for the breeding business but dropped for the slaughtering business. We estimate that the US pork business delivered small profits in 2Q22. Looking to 2H22, we suggest watching hog prices and market demand in the US.
　　European business: The European breeding business turned around in 2Q22 as hog prices increased QoQ. We think this segment’s profit improved QoQ in 2Q22.
　　In addition, Smithfield announced in June on its official website that it would shut down a midstream production base in early 2023 and cut back its midstream and upstream businesses （i.e., hog slaughtering and breeding businesses） on the US West Coast. The firm plans to transfer the capacity to the Midwest production bases with lower costs and higher efficiency. Over the short term, we think the firm likely provisioned for the project in 2Q22, affecting its pre-tax profit. We expect these provisions to be released in the future.
　　Financials and valuation
　　We keep our core attributable net profit forecasts unchanged at US$1.43bn for 2022 and US$1.45bn for 2023. The stock is trading at 6.8x 2022e and 6.7x 2023e P/E. We maintain an OUTPERFORM rating and our TP of HK$6.40, implying 7.4x 2022e and 7.3x 2023e P/E, with 8.7% upside.
　　Risks
　　Impact of global hog prices, meat prices and COVID-19 on the profit of the firm’s pork industrial chains in China, the US and Europe.